Saturday, March 12, 2011

The stock is now suspended without news. We do not even know who called for the suspension.

It is time for the big reveal...

Just to amuse you though I want to run you through an email exchange I had with Snowball - the anonymous blogger at "Good Stock Bad Stock". I read his blog irregularly.

You see Snowball is a self-confessed "beginner" value investor - but he managed to write a seemingly balanced piece on CCME. He then suggested he was going long. So out of the kindness I wrote him a letter to try and convince him out of it.

This is how it ended:

You wrote an ambivalent piece on CCME. I am not sure there is much to be ambivalent about there. Indeed your idea that you might find 10 of these - half will be frauds - and you will be up is a first cut.

But can I put it another way. Taleb argues that you flip a coin 50 times and it comes back heads 50 times. You then ask a mathematician what it will be on the 51st throw. The mathematician says it should be 50 percent heads, 50 percent tails. After all probability is uninfluenced by prior events.

The trader is more canny. He says it will be heads. The coin is rigged.
Of course the trader is right.

Now have a look at the overlap between S-Chip scandals and CCME. And ask yourself whether your 50-50 guess is right.

You know what I think: the coin is rigged.

Snowball I think heeded the advice. I think Snowball owes me - but I guess we find out today!

John, would a clean Deloitte audit change your opinion on whether CCME is a fraud or not? or would your thesis remain the same?

Are you willing to concede that there's a probability (however unlikely) that the company is legitimately running a monopolized business that is simply hard to observe due to the ridiculously large geographic scope and loose business standards in China?

I'm trying to reconcile my view with yours, and I guess it stems from two possibilities:

1) The red flags on our lists are, for the most part, identical, except I'm reasonably more satisfied with the answers provided to those flags in the public forum (GH Research, Star DD, Deloitte, Nielsen, WCTBills, etc.)

2) There's a bunch of red flags that you're basing your view on that I (and the general public) am not aware of.

If scenario 1 is the case, I'm comfortable that everyone makes decisions and benefits/suffers the consequences of them.

If scenario 2 is the case, it worries me and I would love to know more about your red flags. I don't expect you to share them (but it doesn't hurt to ask).

I suppose where this is coming from is that your current opinion (which sounds nearly 100% certain that they are a fraud) is, to me, a significant departure from your February 4th blog post where you said:

"Was I confident about this? No. That is one reason why my position was small"

and,

"At this point you know my (weakly held) view. I still welcome criticism in the comments."

For what it's worth, my view on the market is that there's roughly an 80% chance of fraud baked into the stock, and aside from people that have absolute inside information of the outcome, a reasonable confidence level of fraud falls somewhere between 50-80%.

http://investorshub.advfn.com/boards/replies.aspx?msg=60750560Responses on IHUB's CCME fan site

Here is the Investor Presentation given the backdoor listing merger. The summary of the transaction is on page 4. It was technically a SPAC, but nearly 100% of the SPAC shareholder decided to cash out instead of continue as shareholders of CME.http://sec.gov/Archives/edgar/data/1399067/000095012309015690/c87095exv99w2.htm

In 2010, Zheng Cheng and the Lin brothers (Bright Elite and Thousand Space) received $30.9 million in cash from the company, as part of the transaction consideration (see cashflow statement in Q3 2010 10-Q)- $20.9 million - $10 million from the payment of the note

The Lin brothers have also sold at least 2.6 million shares for over $30 million- $9 mil (1 million shares sold by Thousand Space to Starr at $9 / share)- $4.5 mil (500K shares sold by Bright Elite to Starr at $9 / shares)- ~$17 mil (1.1 million shares at between $15 to $17 per share sold by Bright Elite on the market (after hours) from Dec. 16 to Jan. 10; may have already sold the rest)

The CEO Cheng Zheng also received a $17 mil dividend in Feb 09 before the merger.

A strange thing is the Cheng still owned 100% of CME when he received the dividend in Feb 09. By the time of the merger in late 09, Cheng owned only 61% of CME, with 28% owned by Thousand Space and 11% owned by Bright Elite. It's strange that Cheng would give up ownership of nearly 40% of this very cashflow rich business in just a few months.

http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_C/threadview?m=te&bn=101061&tid=35446&mid=35446&tof=37&frt=2#35446Summary of Disposition by Bright Elite

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The content contained in this blog represents the opinions of Mr. Hempton. Mr. Hempton may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Hempton's recommendations. The commentary in this blog in no way constitutes a solicitation of business or investment advice. In fact, it should not be relied upon in making investment decisions, ever. It is intended solely for the entertainment of the reader, and the author. In particular this blog is not directed for investment purposes at US Persons.